Methods and systems for netting of payments and collateral

ABSTRACT

The present invention generally provides for systems and methods for netting payments and collateral. Generally, systems and methods of the present invention maximize market liquidity and minimize financial risk and collateral burdens of participants.

CROSS-REFERENCE TO RELATED APPLICATIONS

This non-provisional patent application is a continuation application ofprior U.S. utility application Ser. No. 11/260,991, filed on Oct. 28,2005, which claims the benefit of U.S. provisional application No.60/623,298, filed Oct. 28, 2004, the entire contents of both of whichare incorporated herein by reference in their entirety.

TECHNICAL FIELD OF THE INVENTION

The present invention relates to systems and methods, including computerprogram products, for netting payments and other obligations (e.g., theobligation to post collateral or credit support) involving financialcontracts. Generally, systems and methods of the present inventionmaximize market liquidity and minimize financial risk and collateralburdens of participants.

BACKGROUND OF THE INVENTION

A great deal of financial exposure exists for traders in financialmarkets. For example, in the energy markets, energy traders generallybuy and sell several different energy commodities, such as electricity,oil, natural gas and coal. However, these energy traders tradecommodities both in a physical sense, where actual delivery of a productwill eventually take place, and in a financial sense, where only moneywill change hands based on future market value. Energy traders oftentrade these commodities with each other—exchanging different quantitiesof the same commodity several times during a given month, week or day.As a result of this web of trading contracts, the financial exposurebetween companies might be billions of dollars on any given day. Whenone of these companies encounters financial difficulties, causing it todefault under an agreement or file for bankruptcy, the stage is set forfinancial disaster.

The collapse of large energy trading companies such as Enron and Dynegyare real-life examples of this problem, which has resulted in changes tocurrent energy trading. The extent of money lost reach into the billionsof dollars due to these scandals and has resulted in lawsuits andcriminal charges. Under traditional trading agreements, a defaultingcompany might be able to avoid payment of outstanding obligations, yetstill collect payments that it is owed. Further exacerbating theproblem, the company required to make payment without receiving what itis owed might then be forced to default on its obligations to othercompanies.

As such, energy traders have a heightened interest in dealing withcompanies with appropriate creditworthiness. However, obtaining thenecessary credit is a time-consuming and expensive proposition for mostparticipants. Furthermore, obtaining the appropriate credit is a slowand cumbersome process that can impede the efficiency and speed oftrading in energy. Not to mention, obtaining credit is a drain on thebalance sheets of many companies. Since energy trading companies do muchof their trading with each other, there is a need to create efficientstrategies for maximizing market liquidity and minimizing collateralburdens for these participants.

Accordingly, there is a need in the art for methods and systems fornetting payments and/or collateral obligations that maximizes marketliquidity and minimizes collateral burdens between participants.Particularly, there is a need of such methods and systems in the energyindustry.

SUMMARY OF THE INVENTION

Netting arrangements between parties in volatile and irregular marketsmaximize market liquidity while reducing financial (or market) riskbetween the participants. Methods and systems of the present inventioninvolve netting payments or collateral obligations between participants.Generally, the invention includes automated settling or reducing of anamount of a payment or a collateral obligation for a first participantowed to a second participant. In some embodiments of the invention, thesettling or reducing step is performed by a clearing organization.However, in other embodiments, the payment or collateral obligation owedby one participant to a second participant is a result of a bilateral ormultilateral agreement between the two or more participants. In someembodiments, methods and systems include a network for settling and/orreducing payment and/or collateral obligations between participants.

In some embodiments, the present invention also generally provides forthe reduction of the amount of collateral or other credit supportrequired to be provided by a participant in satisfaction of a collateralobligation. Also, in some embodiments, the present invention generallyprovides for the reduction of the amount of any cash payment required tobe made by said first participant in satisfaction of a paymentobligation. Reducing the amount of collateral and/or the amount ofmonetary payment required for a particular transaction (or series oftransactions) provides market efficiencies, particularly in the energymarket.

Methods and systems of the invention maximize market liquidity andminimize collateral burdens on a participant, such as an energy marketparticipant. In addition, in some embodiments, methods and systems ofthe invention provides a solution that does not involve creditintermediation via a central counterparty, does not expose a participantto additional risk, and/or disrupt or negatively revise the originalcredit obligations/considerations.

Participants according to the present invention include individuals,traders, companies, and any other entities that deal with payments andcollateral obligations. Participants can also include, withoutlimitation, dealers/trading firms, brokers, banks, custodians, mutualfunds, insurance companies, hedge funds, etc. For examples, participantsinclude Forward Contract Merchants (FCM's).

In preferred embodiments, participants include individuals and entitiesthat are involved in the energy markets. The problems associated withhigh risk and exposure can be especially oppressive in the energymarkets. Netting arrangements can benefit participants in the energymarkets to maximize market liquidity while reducing financial (ormarket) risk between the energy participants. Generally, participants inthe energy market are associated with high risk due to high collateralrequirements on trades, high counterparty failure risk and expensivecredit intermediation. A great deal of collateral is required in energyto secure payments due on energy delivered, to secure for failure toperform/pay on other contracts, and to secure credit enhancement for theenergy participants.

As such, netting systems and methods described herein lower barriers toentry for energy market participants. In addition, the methods andsystems of the present invention do not change or disturb the existingcredit relationships. In fact, systems and methods of the presentinvention reduce obligations between any two participants to makepayments or post collateral, and never increases such obligations.Moreover, the present invention does not reverse obligor/obligerelations between two participants. Furthermore, the present inventiondoes not create new obligations between two parties that did not existprior to the netting methods described herein.

Generally, netting according to some embodiments of the presentinvention involves off-setting with at least one market participant offinancial payments or obligations one is owed with those one is entitledto receive, thus reducing the costs arising out of settlements. Nettingalso is used as a risk management tool to help market participantsreduce their exposure to market or credit risk. For example, nettinggenerally reduces transfers of funds between market participants to anet amount by mutually offsetting claims and liabilities fromtransactions between participants.

As described herein, some embodiments of the present invention alsooptimizes or makes more-efficient intra-group capital/commoditytransactions. In a basic example, netting involves the mutual offsettingof payments due between business entities. For example, if Company Aowes Company B $100, and Company B owes Company A $60, a single paymentof $40 from Company A to Company B would eliminate both debts. This isnetting. Total transaction costs and capital required are mitigated bynetting.

There are various multilateral netting schemes according to theembodiments of the present invention. Payment netting is a process thatis applicable to payments on matured contracts or those that areterminated or perceived to be terminated under the applicable insolvencylaws. Payment netting generally constitutes finding round trips that aredeemed paid by a clearing organization or netted out and then left withbilateral payment obligations. Another type of multilateral nettinginvolves netting of collateral obligations. Sources of collateralrequirements includes, for example, security for payments due on energydelivered (complete principal risk), security for failure to perform/payon other contracts (primarily market/cover risk); and, security forcredit enhancement. Collateral requirements are particularly problematicfor energy market participants because of a lack of ready collateral onbalance sheets of energy trading firms due to the high use of letters ofcredit and cash in the industry. Generally, methods and systemsaccording to this embodiment of the invention involve finding roundtrips of collateral. For those round trips that are identified, cashpayments/credits are deemed to have moved on the “books” of the clearingorganization, without the infusion of collateral or other assets on thepart of the participants.

The present invention is intended to reduce risk by participants throughpayment and collateral obligation netting. As described herein, nettingallows the participants to set-off any amounts they owe each other andonly pay the “net” owed from one party to the other. The presentinvention manages various agreements under one system that manages thepayment and collateral obligations between the participants.

One advantage of the methods and systems of the present invention isthat a participant does not have to unwind the system if a participantwere to fail in their obligations or payments. The invention providesfor the reduction of the amount of payment or collateral needed betweenparticipants, through set-off reductions. Assets are deemed to havemoved in respect of obligations netted out.

In one embodiment, the present invention includes netting methods andsystems for use in post-trade processing for the commodity and capitalmarkets, comprising all assets classes, over-the-counter (OTC) andlisted derivatives markets relating to underlying commodities andsecurities (including financial instruments or contracts). The presentinvention also includes collateral and payment netting of bilateralcontracts and contracts with and between Independent ServiceOrganizations (ISO's.) Also included in some embodiments of theinvention are physical and financial settled products.

In a preferred embodiment, methods and systems of the invention includefinancial or commodity markets, and more particularly, energy markets(e.g., U.S. energy market). In a more preferred embodiment, theinvention involves power, natural gas and oil contracts. As such,contracts according to the invention include financially and physicallysettled spot and forward contracts for power, natural gas and oil, aswell as related derivative contracts, including futures, swaps, options,contracts for difference and the like.

To the extent the contracts are OTC, they will be comprised either ofbilateral contracts between two participants, for example, in the U.S.energy markets, contracts matched by a broker or a matching service, orcontracts executed in markets operated by Independent Service Operators(“ISOs”) or Regional Transmission Operators (“RTOs”). ISOs and RTOsoperate under the jurisdiction of regulatory bodies at the Federal andState level.

To the extent the contracts are listed energy derivative contracts, theymay be comprised of the standardized contracts executed on an energyexchange including, for example, NYMEX or the Intercontinental Exchange.

Contracts, according to the invention, give rise to the obligation tomake cash payments, generally either as a result of receipt of power,gas or other commodity, or else pursuant to the terms of relatedderivative contracts calling for scheduled payments (which may be fixedor variable) or payments upon the occurrence of designated events.Contracts also may give rise to payment obligations upon earlytermination pursuant to their terms.

For purposes of the present invention, a payment obligation can arisewhen the payable accrues, regardless of the fact that billing cycles ornormal payment terms and processes result in actual payment being madeother than on date of accrual. Alternatively, in another embodiment, apayment obligation can arise when they are actually due and payable. Inyet another embodiment, a payment obligation can include any forwardobligation to pay that has not accrued or become due and payable. Assuch, systems and methods of the present invention can operate undereither option or any combination thereof.

As described herein, the present invention can include a collateralobligation. For example, one or more of the participants to any contractmay be obligated to post collateral with, or otherwise provide creditsupport to, one or more other participants pursuant either to the termsof the contract itself or pursuant to other binding arrangements. Thesebinding arrangements (legal or otherwise may include bilateral mastercredit agreements between participants, master purchase and saleagreements, industry standard agreements and the rules and regulationsof ISOs and RTOs executing the contract) obligating participants to thecontracts to post collateral or provide credit support in connectionswith their obligations under such contracts. Methods and systems of theinvention also support an independent pricing source for collateraldetermination. In some embodiments, the invention includes twoparticipants that are participants to a contract. In other embodimentsof the invention, more than two participants are participants to acontract.

At any given time, any participants to one or more contracts may haveone or more payment obligations and/or collateral obligations owinganother participants to the same contracts. It is not unusual for theseobligations to be netted (legal or otherwise) on a bilateral basisbetween the two participants, but they need not be. Bilateral netting ofpayment and collateral obligations (as described herein) may be effectedas an operation undertaken according to the invention, however suchbilateral netting is not required or essential. In one embodiment, theresult of any such bilateral netting would be to make it so that thereis at most one payment obligation and one collateral obligation betweenany two participants to contracts subject to methods and systemsaccording to the invention.

Exemplary netting procedures described herein that involve payment andcollateral obligations may operate in one of two related, yet distinct,ways (as described herein). Two contemplated commercial services and/orproducts include “DTCC Paynet™” and “DTCC CollateralNet™”, whichrespectively is directed to payment obligations and collateralobligations. The particular service or product that is utilized dependson the circumstances and needs of the participants to the contracts. Insome embodiments, where the processes are identical, the payment andcollateral obligation schemes (i.e., “DTCC Paynet™” and “DTCCCollateralNet™”) may be combined as described herein.

Generally, a network according to the present invention can include atleast one server in communication with the network for transmitting thedata appropriate for netting payment and/or collateral obligations(e.g., amount and/or type of payment and/or collateral). In addition, anetwork can include at least one receiver for receiving this data. Thereceiver can provide access for a participant or a user to access theinformation and/or commence netting of payment and/or collateralobligations. A receiver can include an appropriate identifier that canprovide an authorized participant or user access to this data. Thereceiver also can be in communication with the network and/or server(s).In addition, a receiver can have any appropriate audio and/or visualdisplay for allowing a participant to obtain the data that istransmitted. In some embodiments, a server according to the presentinvention is a database server.

A server according to the invention retrievably stores the dataappropriate for netting payment and/or collateral obligations. In otherembodiments, a provider in communication with the network can broadcastor transmit the information to a receiver so that a participant can haveaccess to the information. A network can include at least one webserver. The web server can be in communication with the network. The webserver allows for accessing and/or transmitting data via the Internet.Networks can include wireline or wireless networks, such as the WAN,Internet, cellular, Bluetooth, satellite, company intranets, and thelike. Any appropriate network for transmitting data between participantsis contemplated according to the present invention. In some embodiments,the data transmitted in the network can be encrypted using anyappropriate encryption algorithm (e.g., using 128-bit cipher strengthencryption).

Description of Netting Processes—General Clearing Organization Operation

In some embodiments, the invention includes bilateral or multilateralagreements between participants that do not include a clearingorganization. For example, methods and systems of the invention involvea contract or process that is agreed among parties to Contracts (i.e.,without a clearing organization.) However, in some embodiments of theinvention, methods and systems include a clearing organization. Inrelated embodiments, the payment and collateral netting schemes areoperations undertaken by a “clearing organization” as defined in theFederal Deposit Insurance Corporation Improvement Act of 1991(“FDICIA”), particularly 12 U.S.C. section 4401 et. seq. Also, in someembodiments, a clearing organization includes any organization thatpurports to effect or settle payment obligations or other obligations totransfer or pledge assets or that purports to net such paymentobligations or obligations to transfer or pledge assets.

A participant according to the invention can establish accounts with aclearing organization for purpose of effecting payments andtransferring, pledging or providing collateral. Generally, a participantshould execute an agreement to be bound by the rules governing thenetting systems and methods described herein. Also, participants shouldreport payment and collateral obligations and/or agree on third partyreporting. In some embodiments, a clearing organization can operate apayment/deal reconciliation service in a derivatives market, forexample. Participants should also pay netting fees sufficient to coveroperating costs of providing the netting systems and methods.

The PayNet™ and CollateralNet™ operations will be binding onparticipants to contracts that participate in the PayNet™ orCollateralNet™ processes as a result of contracts executed betweenparticipants and the clearing organization. Each participant must openone or more accounts at the clearing organization for the purpose ofeffecting payments and transferring, pledging or providing collateral.

General Aims of Netting Methods

In some embodiments of the invention, as further described below, thepayment and collateral netting schemes (e.g., PayNet™ or CollateralNet™services and products) can operate in either of two ways.

“Method 1 Netting”: First, in some embodiments, methods and systems ofthe invention will reduce the amount of the payment obligation orcollateral obligation that may exist at a given time between two partiesto contracts. In other embodiments, the amount of the payment obligationor collateral obligation may be reduced to zero. In these embodiments,the netting processes will never increase the amount of any payment orcollateral obligation between two parties or to cause an payer/obligorunder a payment or collateral obligation to become a payee/obligee (andvice versa). Nor will the processes operate to create a payment orcollateral obligation between parties to contracts that did not have oneor create any payment or collateral obligations to or from parties tocontracts and some third party or participants (such as a centralcounterparty clearing organization).

“Method 2 Netting”: Second, in some embodiments, methods and systems ofthe invention will reduce the amount of collateral or other creditsupport required to be provided by a party in satisfaction of itscollateral obligation; or, to reduce the amount of any cash paymentrequired to be made by a party in satisfaction of its paymentobligation. As such, in either case, the amount of the collateralobligation or payment obligation will not be reduced. Rather, theportion of a participant's collateral obligation or payment obligationnot satisfied by the participant individually through the provision ofcollateral or the making of a cash payment will be satisfied through theoperation of the methods and systems of the invention, as describedherein.

Reporting of Payment and Collateral Obligations to the ClearingOrganization

According to embodiments of the invention that include a clearingorganization, PayNet™ or CollateralNet™ processes, for example, will beapplied to payment obligations and collateral obligations reported tothe clearing organization by participants or by third parties designatedunder the rules of the clearing organization applicable to theprocesses. In some embodiments, the clearing organization will verify ortake responsibility for the accuracy of the reported obligations. Wherethe clearing organization does not verify or take responsibility for theaccuracy of the reported obligations, in some embodiments, it will bethe responsibility of the participants to assure that the reportedobligations are binding and enforceable as reported and participantswill so represent to the clearing organization.

Bilateral Netting

In general, participants to contracts may have arrangements in placeunder which payment obligations and/or obligations to provide collateralunder multiple contracts are netted bilaterally to one net amount(either payment or collateral) owed by one participant to the other.Where this is the case, payment obligations or collateral obligationscould be reported already netted. Where this is not the case or wherethe payment or collateral obligations are not reported on a bilaterallynetted basis, the clearing organization will effect bilateral netting ofall payment and collateral obligations in the same currency byarithmetically adding the payment or collateral obligations between anytwo participants (pay/deliver obligations being negative numbers andreceive obligations being positive numbers).

Under the “Method 1 Netting” embodiment, the reported multiple paymentor collateral obligations between two participants will be replaced witha single obligation equal to the foregoing arithmetic sum. Under the“Method 2 Netting” embodiment, the reported multiple payment orcollateral obligations will be marked on the books of the clearingorganization as satisfied to the extent they can be through the transferof equal and offsetting cash amounts. Again, an obligation in the amountof the foregoing arithmetic sum will remain unsatisfied and will betreated as a reported obligation for the purposes of methods and systemsof the invention as described herein.

A detailed description of certain embodiments of the invention isprovided below. Other embodiments, features, aspects and advantages ofthe invention are apparent upon review of the detailed description andaccompanying drawings that follow.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1A is an exemplary illustration of a round robin obligation.

FIG. 1B is an illustration of the post-netting obligations to be settledindividually amongst participants of the round robin illustration ofFIG. 1A.

FIG. 2 is an exemplary illustration of a complex round robin involvingan initial, bilaterally netted obligations (either payment orcollateral).

FIG. 3 illustrates the first iteration of the round robin process ofFIG. 2.

FIG. 4 illustrates the second iteration of the round robin process ofFIG. 2.

FIG. 5 illustrates the third iteration of the round robin process ofFIG. 2.

FIG. 6 illustrates the fourth iteration of the round robin process ofFIG. 2.

FIG. 7 illustrates the fifth iteration of the round robin process ofFIG. 2.

DETAILED DESCRIPTION OF THE INVENTION

According to the present invention, in general, netting is theoffsetting with a counterparty of financial obligations or payments oneis owed with those one is entitled to receive, thus reducing the costsarising out of payment settlements. Netting also is used as a riskmanagement tool to help participants reduce their exposure to creditrisk. Netting generally reduces transfers of funds between marketparticipants (e.g., separate companies) to a net amount. Nettingmutually offsets claims and liabilities from identical types oftransaction between parties, and is important in connection with thecapital adequacy requirements applicable to energy traders, for example.

PayNet™ or CollateralNet™ Services and Products Identification of “RoundRobin” Obligations

At the times and in intervals designated in the rules of the clearingorganization (or pursuant to contract with participants), in someembodiments, the clearing organization will identify “round robin”payment and collateral obligations from those reported to it (and afterany necessary bilateral netting as described above). Round robin paymentor collateral obligations are those that could be satisfied through themovement of cash from one participant to another where cash initiallymoved from one participant would ultimately end up being transferredback to that participant.

In its simplest form, a round robin obligation would pass through threeparticipants and would constitute the smallest payment or collateralobligation between any two of those three participants.

FIG. 1A is an exemplary illustration of a round robin obligation.Participants A, B, C and D along with their respective paymentobligations are provided in FIG. 1A. As shown in FIG. 1A, two separateround robins can be identified from these relationships: First, there isan obligation of 6 from A to B to C back to A. Note that it does notmatter which participant is chosen as the starting point. Second, thereis an obligation of 2 from A to B to D back to A.

Application of “Method 1 Netting” to the Round Robins

Once round robins have been identified, the clearing organization wouldeliminate all round robin obligations, thus reducing the bilateralobligations each applicable participant had with each other. In the caseof the above example, as shown in FIG. 1B, elimination of both roundrobins would result in the following post-netting obligations to besettled individually amongst participants:

D owes 2 to A

A owes 2 to B

B owes 2 to C

As shown in FIG. 1B, the obligation of 2 may either be collateral or apayment obligation, but it is likely that “Method 1 Netting” will beused primarily or exclusively for DTCC PayNet™, for example.

According to the present invention, no further netting is carried outunder Method 1 for the example above. While it may be intuitive toattempt, in the above example, to remove A and B as unnecessary links ina payment chain beginning with D and ending with C, to do so wouldcreate obligations where none existed before, violating the nettingconstraints described at the outset.

Application of “Method 2 Netting” to the Round Robins

In some embodiments, once round robins have been identified, theclearing organization of the present invention would actually effectcash payments in accordance with the identified round robin obligationsby marking its books to reflect the appropriate cash movements,regardless of whether the obligations were payment obligations orcollateral obligations. In the case of the above example, as shown inFIGS. 1A and 1B, the books of the clearing organization would reflectthe following cash movements:

-   -   6 from A to B to C to A (note that it does not matter which        participant is taken as the starting point, it is equivalent to        have the books reflect 6 from B to C to A to B or from C to A to        B to C)    -   2 from A to B to D to A

In some embodiments, the rules of the clearing organization (binding onthe participant) will provide that collateral obligations may besatisfied through actual transfers of cash. As such, the clearingorganization will obtain comfort that “Method 2 Netting” will have thesame effect as physical transfers of cash in accordance with theidentified round robins.

After the application of “Method 2 Netting”, as shown in FIG. 1B,participants would be left with the same obligations to fulfill amongstthemselves as they have under “Method 1 Netting”, regardless of whetherthey are payment obligations or collateral obligations.

In embodiments where A is an independent service organization (“ISO”),the payments required under the round robin payment or collateralobligations are eliminated from the ISO's books. As such, theobligations payable are no longer due and owning under the paymentnetting methods according to the invention.

Application of Netting Across Payment and Collateral Obligations

According to the present invention, to the extent that the above nettingmethods are used for payment obligations and collateral obligations, thefollowing additional netting processes may be offered by the clearingorganization. All obligations, whether payment or collateral, between toparticipants will be bilaterally netted as described above (inaccordance with either Method 1 Netting or Method 2 Netting). Method 1Netting or Method 2 Netting would then be applied to remaining netobligations between parties. When Method 1 Netting is used, paymentobligations of any participant will be eliminated first, then collateralobligations. When Method 2 Netting is used payment obligations of anyparticipant will be satisfied through netting operations first, thencollateral obligations.

EXAMPLES Example 1 Validation of Round Robins and Examples of ComplexRound Robins Validation of Round Robins

Valid round robins can be detected by selecting the possiblepermutations of payment or collateral obligations, and checking whetherall obligations are in the same direction—if so, the round robin amountis the smallest absolute value of these obligations as described below.

Select mutual obligations for participants A, B, and C:

A owes B: 50 B owes C: 100 C owes A: 150

A valid round robin with a value of 50 can be extracted from thisrelationship.

By contrast, select mutual obligations for participants D, E, F:

D owes E: 50 E owes F: 100 F owes D: 150

Under the rules of the clearing organization, these obligations, whetherpayment or collateral could be satisfied through cash transfers, but nocash transfers beginning with any one participant would be transferredback to that participant under these obligations.

Example 2

An example of a complex round robin is illustrated in FIG. 2, whichprovides an example of an initial, bilaterally netted obligations(either payment or collateral).

Validation of Round Robins and Examples of Complex Round Robins

As detailed in FIG. 2, there are two three-way round robins (ABC, ABE)and two, four-way round robins trade (BEFG, BDFG).

Determining the Size of Round Robins

Once the entire bilaterally netted obligation structure has beenconstructed the netting process can operate to maximize the size of thenetted amount (round robin obligations) within each three- and four-wayround robin. One method of doing this is illustrated in FIGS. 3-7 anddescribed herein. FIG. 3 illustrates the first iteration of the process:an initial amount of 25 is possible for all four round robins in theobligation structure. This reduces each obligation in the structure by25 and the two obligations that are part of two round robins (A to B andB to E) by 50 each. This outcome of the first iteration is described inthe table at the bottom of FIG. 3.

Breaking Ties

FIGS. 3-7 illustrate that the process will always seek round robins thatreduce original obligations to zero, if possible, even if it meansbreaking a tie. This is illustrated in FIG. 4 (“Iteration 2”). After thefirst iteration, it is possible to reduce positions in round robin ABCand ABE further only if the remaining 25 obligation of A to B isallocated to round robin ABC or ABE. In each situation like this, theprocess will allocate an obligation to a round robin at random. Thissituation could arise whenever an obligation is potentially part of twodifferent round robins.

Achieving Maximum Set-Off

Further reduction of positions is possible only through the round robinBEFG. This process is illustrated in FIGS. 5-7 (“Iterations 3-5). In thethird, fourth and fifth iterations, the round robin amount for BEFG isincreased by a total of 75. At the end of each iteration, the processchecks for ties (there aren't any in this case, as there is only oneround robin that can be subject to additional netting) and these areresolved. When obligation E-F is fully reduced, the round robin BEFGcannot be further reduced. The determination of the maximum amounts forthe round robins in this obligation structure is now complete.

The above-described methods and systems can be implemented, in whole orin part, in digital electronic circuitry, or in computer hardware,firmware, software, or in combinations thereof. The implementation canbe, for example, a computer system or network for managing the nettingor setting-off of payments and collateral. A computer program or productis also contemplated for providing a market participant or clearingorganization with the tools for implementing the processes providedherein. For example, the implementation can be as a computer programproduct, i.e., a computer program tangibly embodied in an informationcarrier, e.g., in a machine-readable storage device or in a propagatedsignal, for execution by, or to control the operation of, dataprocessing apparatus, e.g., a programmable processor, a computer, ormultiple computers. A computer program can be written in any form ofprogramming language, including compiled or interpreted languages, andit can be deployed in any form, including as a stand-alone program or asa module, component, subroutine, or other unit suitable for use in acomputing environment. A computer program can be deployed to be executedon one computer or on multiple computers at one site or distributedacross multiple sites and interconnected by a network.

In some embodiments, the invention features a system and method fornetting or setting-off of payments and collateral for participants andclearing organizations in the energy industry. In one embodiment,multimedia information related to the payment obligations or collateralobligations, for example, may be displayed to at least one of theparties to monitor the status of a netting process. A communicationchannel can be opened over a network between the parties. The networkcan be a LAN, WAN, Intranet, the Internet, or the World Wide Web. Insome embodiments, the communication channel can convey voice and/or textcommunications.

Method steps can be performed by one or more programmable processorsexecuting a computer program to perform functions of the invention byoperating on input data and generating output. Method steps can also beperformed by, and apparatus can be implemented as, special purpose logiccircuitry, e.g., an FPGA (field programmable gate array) or an ASIC(application-specific integrated circuit). Modules can refer to portionsof the computer program and/or the processor/special circuitry thatimplements that functionality.

In some embodiments, content related to the implementation of thestrategy provided herein can be displayed to each party. Messages areexchanged in real-time between the parties over the communicationchannel to allow the parties (including the clearing organization) toreview the status of the round robin or determine the netting effect,for example. Messages exchanged over the communication channel can guidethe parties to take actions that lead toward implementing the inventionprovided herein.

In one aspect, the invention features a system for netting orsetting-off of payments and/or collateral. The system comprises aplurality of client systems in communication with each other clientsystem over the network using a communication channel. A server system,in communication with the plurality of client systems, presents theusers of the client systems with a status of the netting process. Theclient systems exchange messages in real-time over the communicationchannel. The server system dynamically updates the content displayed tothe client system users based on an action taken by one of the clientsystem users or data provided to the system.

In another aspect, the invention features an article of manufacturehaving computer-readable program means embodied thereon for implementingthe processes provided herein (e.g., netting or setting-off of paymentsand/or collateral.) The network over which the client systems and theserver system communicate can be a local area network (LAN), a wide areanetwork (WAN), or a global network of networks such as the Internet andthe World Wide Web. The client systems and the server system can connectto the network through a variety of connections including standardtelephone lines, LAN or WAN links (e.g., T1, T3, 56 kb, X.25), broadbandconnections (e.g., ISDN, Frame Relay, ATM), and wireless connections(e.g., 802.11 standards). Systems 4, 6 can establish connections using avariety of communication protocols (e.g., HTTP, TCP/IP, IPX, SPX,NetBIOS, Ethernet, RS232, and direct asynchronous connections).

Each client system can be any processor-based device (e.g., a personalcomputer) capable of displaying Web documents (e.g., HTML, XML Webpages) and communicating with the server system according to a protocolthat transmits such Web documents. Each client system includes a displayscreen, a keyboard, a pointing device (e.g., a mouse, trackball,touch-pad, touch-screen, etc), a microphone, one or more speakers, aprocessor, and persistent storage (not shown). The operating system ofeach client system can be one of a variety of windows-based platformsincluding but not limited to WINDOWS® 3.x, WINDOWS® 95, WINDOWS® 98,WINDOWS® NT 3.51, WINDOWS® NT 4.0, WINDOWS® XP, Macintosh® and Unix,DOS, Linux®, PALM® and WINDOWS® CE for windows-based terminals. Theoperating system produces a graphical user interface through which theuser of the client system can interact with the display (e.g., byinputting information, clicking on objects, icons or menu items, openingand closing windows, and scrolling a displayed windows) using thekeyboard or the pointing device.

The client systems can include browser software and a JVM (Java VirtualMachine). An exemplary embodiment of the browser is MICROSOFT INTERNETEXPLORER® manufactured by Microsoft Corporation of Redmond, Wash. Thebrowser sends requests over the network to retrieve a Web document orWeb page from a Web server (e.g., Web server described further below).The browser then processes the downloaded Web page with any accompanyinggraphics files and applets, and displays the results on the displayscreen of the client system. The JVM operates as an interpreter betweenJava bytecode and the operating system of the client system.

Voice capability can also be achieved through one of a variety ofcommercially available products, such as HearMe SDK (softwaredevelopment kit) or Roger Wilco, both manufactured by HearMe, or JavaMedia Framework, manufactured by Sun Microsystems of Palo Alto, Calif.and IBM of Armonk, N.Y. These products provide voice chat capabilitiesin the form of reusable software components such as ActiveX controls,browser plug-ins, APIs (application program interface), SDKs, and DLLs(dynamic link libraries).

To provide for interaction with a user, the above described techniquescan be implemented on a receiver having a display device, e.g., a CRT(cathode ray tube) or LCD (liquid crystal display), for displayinginformation to the user. Other kinds of devices can be used to providefor interaction with a user as well; for example, feedback provided tothe user can be any form of sensory feedback, e.g., visual feedback,auditory feedback, or tactile feedback; and input from the user can bereceived in any form, including acoustic, speech, or tactile input.

The server system can be in communication with a database and a Webserver. The database stores data such as company information, commodityinformation, asset price, commodity price, asset valuation, commodityvaluation, share price, share valuation, collateral price, collateralvaluation, tracking stock price, tracking stock valuation, and otherrelated information.

The invention also contemplates a Web server that supports a Web site(accessible worldwide) through which users of the client systems canlaunch a program provided herein. The Web site includes a plurality ofWeb pages that receive the users of the client systems (a receptionpage).

The present invention may be implemented as one or morecomputer-readable software programs embodied on or in one or moreinformation carriers suitable for embodying computer programinstructions and data include all forms of non-volatile memory,including by way of example semiconductor memory devices, e.g., EPROM,EEPROM, and flash memory devices; magnetic disks, e.g., internal harddisks or removable disks; magneto-optical disks; and CD-ROM and DVD-ROMdisks. The processor and the memory can be supplemented by, orincorporated in special purpose logic circuitry. In general, anystandard or proprietary, programming or interpretive language can beused to produce the computer-readable software programs. Examples ofsuch languages include C, C++, Pascal, JAVA, BASIC, Visual Basic®, andVisual C++®. The software programs may be stored on or in one or morearticles of manufacture as source code, object code, interpretive code,or executable code.

The above described techniques can be implemented in a distributedcomputing system that includes a back-end component, e.g., as a dataserver, and/or a middleware component, e.g., an application server,and/or a front-end component, e.g., a client computer having a graphicaluser interface and/or a Web browser through which a user can interactwith an example implementation, or any combination of such back-end,middleware, or front-end components. The components of the system can beinterconnected by any form or medium of digital data communication,e.g., a communication network. Examples of networks include a local areanetwork (“LAN”) and a wide area network (“WAN”), e.g., the Internet, andinclude both wired and wireless networks.

The computing system can include clients and servers. A client andserver are generally remote from each other and typically interactthrough a network. The relationship of client and server arises byvirtue of computer programs running on the respective computers andhaving a client-server relationship to each other.

The invention may be embodied in other specific forms without departingfrom the spirit or essential characteristics thereof. The invention hasbeen described in terms of particular embodiments. The alternativesdescribed herein are examples for illustration only and not to limit thealternatives in any way. The steps of the invention can be performed ina different order and still achieve desirable results. Other embodimentsare within the scope of the following claims.

1. An automated method for netting payments or collateral obligationsbetween participants, the method comprising the steps of: creating around-round payment or collateral obligation structure between aplurality of participants, and settling the reduction of an amount of apayment or a collateral obligation of a first participant owed to asecond participant.
 2. The method of claim 1, further wherein settlingstep is performed by a clearing organization.
 3. The method of claim 2,wherein said clearing organization as defined in the Federal DepositInsurance Corporation Improvement Act of 1991 (“FDICIA”).
 4. The methodof claim 1, wherein said payment or collateral obligation is a result ofan agreement between at least two of the participants.
 5. The method ofclaim 1, wherein at least one participant is an independent serviceorganization.
 6. The method of claim 1, wherein at least one participantis a regional transmission operator.
 7. The method of claim 1, whereinsaid settling step further comprises reducing the amount of collateralor other credit support required to be provided by a party insatisfaction of a collateral obligation.
 8. The method of claim 1,wherein said settling step reduces the amount of any cash paymentrequired to be made by said first participant in satisfaction of apayment obligation.
 9. The method of claim 1, wherein said settling stepreduces the amount of assets required to be transferred by said firstparticipant in satisfaction of a collateral obligation.
 10. The methodof claim 1, wherein said participant does not have to unwind theobligation structure if at least one participant fails in their paymentor collateral obligation.
 11. The method of claim 1, wherein at leastone participant has more than one payment or collateral obligation insaid obligation structure.
 12. The method of claim 1, wherein saidstructure does not involve credit intermediation via a centralcounterparty.
 13. The method of claim 1, wherein said structure does notexpose at least one participant to financial or collateral risk.
 14. Themethod of claim 1, wherein said structure does not disrupt or revise theoriginal credit obligations/considerations between said plurality ofparticipants.
 14. The method of claim 1, wherein at least oneparticipant is an energy company.
 15. The method of claim 1, wherein atleast one participant is selected from the group consisting of anindividual, a trader, a company, a dealer/trading firm, a broker, abank, a custodian, a mutual fund, an insurance company, and a hedgefund.
 16. The method of claim 1, wherein at least one participant is aForward Contract Merchant.
 17. The method of claim 1, wherein saidplurality of participants belong to a financial market.
 18. The methodof claim 1, wherein said plurality of participants belong to a commoditymarket.
 19. The method of claim 18, wherein said commodity market is aenergy market.
 20. The method of claim 19, wherein said energy marketfurther comprises a power contract, a natural gas contract, or an oilcontract.
 21. The method of claim 20, wherein said contract is a spotcontract.
 22. The method of claim 20, wherein said contract is a forwardcontract.
 23. The method of claim 22, wherein said forward contract is aderivative contract.
 24. The method of claim 23, wherein said derivativecontract is a future, a swap, or an option.
 25. A computer-based systemfor netting payments or collateral obligations between participants, thesystem comprising: a processor; and, a system for netting payments orcollateral obligations between a plurality of participants.
 26. Thesystem of claim 25, further comprising a means for netting payments orcollateral obligations between participants.
 27. The system of claim 25,further comprising a means for automating the netting of payments orcollateral obligations between participants.
 28. A computer programproduct, tangibly embodied in an information carrier, for automatedmethod for netting payments or collateral obligations betweenparticipants, the computer program product including instructions beingoperable to cause data processing apparatus to: create a round-roundobligation structure, and settle the reduction of an amount of a paymentor a collateral obligation for a first participant owed to a secondparticipant.